Your company manufactures a high-efficiency natural gas furnace. The current price is $2000 per unit. The price elasticity of demand is -2.5 for prices between $1500 and $2500. Your CEO has asked you to predict the net effect on demand for various scenarios. You have determined that there are three major factors that will affect your demand: the price of competitors' products, income, and the price of natural gas. You have hired a consulting company to estimate the effects of these factors. The results are as follows: (1) the cross price elasticity of demand between your product and your competitors' products is constant at +.5, (2) income elasticity of demand for your products is constant at +1.6, and (3) the cross price elasticity of demand between your product and natural gas is constant at +.3.
a) By what percent would your demand change if you increased price by 5% and all other factors remained constant?
b) By what percent would your demand change if you did not increase price but your competitors increased their prices by 8% and all other factors remained constant?
c) By what percent would your demand change if you did not increase price but income decreased by 2% and all other factors remained constant?
d) By what percent would your demand change if you did not increase price but the price of natural gas fell by 20% and all other factors remained constant?
e) What is the net effect on your demand of all changes taken together (you increased price by 5% and competitors increased price by 8% and income decreased by 2% and the price of natural gas fell by 20%)? Assume the effects of each change are independent and cumulative.

Question

Your company manufactures a high-efficiency natural gas furnace.  The current price is $2000 per unit.  The price elasticity of demand is -2.5 for prices between $1500 and $2500.  Your CEO has asked you to predict the net effect on demand for various scenarios.  You have determined that there are three major factors that will affect your demand: the price of competitors' products, income, and the price of natural gas.  You have hired a consulting company to estimate the effects of these factors.  The results are as follows: (1) the cross price elasticity of demand between your product and your competitors' products is constant at +.5, (2) income elasticity of demand for your products is constant at +1.6, and (3) the cross price elasticity of demand between your product and natural gas is constant at +.3.
a)	By what percent would your demand change if you increased price by 5% and all other factors remained constant?
b)	By what percent would your demand change if you did not increase price but your competitors increased their prices by 8% and all other factors remained constant?
c)	By what percent would your demand change if you did not increase price but income decreased by 2% and all other factors remained constant?
d)	By what percent would your demand change if you did not increase price but the price of natural gas fell by 20% and all other factors remained constant?
e)	What is the net effect on your demand of all changes taken together (you increased price by 5% and competitors increased price by 8% and income decreased by 2% and the price of natural gas fell by 20%)?  Assume the effects of each change are independent and cumulative.

Quizplus · Accepted Answer

The Answer of Your company manufactures a high-efficiency natural gas furnace.  The current price is $2000 per unit.  The price elasticity of demand is -2.5 for prices between $1500 and $2500.  Your CEO has asked you to predict the net effect on demand for various scenarios.  You have determined that there are three major factors that will affect your demand: the price of competitors' products, income, and the price of natural gas.  You have hired a consulting company to estimate the effects of these factors.  The results are as follows: (1) the cross price elasticity of demand between your product and your competitors' products is constant at +.5, (2) income elasticity of demand for your products is constant at +1.6, and (3) the cross price elasticity of demand between your product and natural gas is constant at +.3.
a)	By what percent would your demand change if you increased price by 5% and all other factors remained constant?
b)	By what percent would your demand change if you did not increase price but your competitors increased their prices by 8% and all other factors remained constant?
c)	By what percent would your demand change if you did not increase price but income decreased by 2% and all other factors remained constant?
d)	By what percent would your demand change if you did not increase price but the price of natural gas fell by 20% and all other factors remained constant?
e)	What is the net effect on your demand of all changes taken together (you increased price by 5% and competitors increased price by 8% and income decreased by 2% and the price of natural gas fell by 20%)?  Assume the effects of each change are independent and cumulative.

Your Company Manufactures a High-Efficiency Natural Gas Furnace